Sponsors Active on Pension Risk and DC Cost Cutting

A new Aon Hewitt survey shows there are many reasons pension
plan sponsors look to address risk in their pension plan offerings, but reducing
Pension Benefit Guaranty Corporation (PBGC) premiums stands out as a common target.

Nearly one in five pension plan sponsors (19%) polled by Aon
Hewitt plans to increase cash contributions this year to reduce future PBGC
premiums assessed against unfunded liabilities. The survey of 183 defined
benefit (DB) plan sponsors found that, as pension plan sponsors continue to look
for ways to reduce risk, almost two-thirds plan to take some risk-mitigating action
in 2015, with settlement strategies topping the list.

Of the sponsors in
the sample reporting the presence of a defined benefit plan, more than one-third (35%)
have an open, ongoing pension plan. Another third (34%) have a plan that is closed
to new hires, and nearly the same number (31%) have a frozen plan.

Unified in their plans to take action on pensions risks and
costs, sponsors report a variety of approaches:

22% of employers are very likely to offer
terminated vested participants a lump sum window in 2015;

21% of employers are considering purchasing
annuities for a portion of their plan participants; and

31% of employers are very likely to adjust plan
assets to better match liabilities in 2015.

“A growing number of plan sponsors anticipate increasing
pension plan costs due to recent changes to the Society
of Actuaries longevity models and rising PBGC
premiums,” says Ari Jacobs, global retirement solutions leader at Aon
Hewitt. “Settlement strategies may be an appropriate approach for well-funded
DB plans, so that pension plan sponsors are able to honor the retirement
benefits promised to participants, while also considering the long-term
financial outlook of the plan.”

Aon Hewitt says its survey also revealed that pension plan
sponsors are increasingly adjusting plan assets to better match liabilities.
More than one-third (36%) have recently made this shift, and, of the remaining
group, another 31% are very likely to make risk-based asset-allocation
adjustments in the year ahead.

Rob Austin, Aon Hewitt director of retirement research,
adds that pension plan sponsors are thinking ahead and are taking actions now
to better position themselves to manage volatility in their pension plans, no
matter what the future economic environment brings. This presents an
opportunity, the company suggests, for plan advisers and consultants to bring much-needed expertise
to these plans, while putting pressure on plan sponsors to
assess internal capabilities and whether outside talent is needed.

In an emerging trend, Aon Hewitt says, 45% of companies
recently conducted an asset liability study to see how well pension plan assets
are matched to anticipated liabilities. Of those plan sponsors that have not
done so, 25% are somewhat or very likely to this year. More than one-quarter of
plans now have an established glide path that increases exposure to fixed-income securities and other risk-hedging strategies as the funded status
improves.

The plan analysis does not end there for plan sponsors,
however, with 18% of companies performing a mortality study in 2014, and
another 10% planning to do so in 2015. More than a quarter of pensions plan
sponsors currently monitor the funded status of their plan on a daily basis, up
from just 12% in 2013.

Other common trends emerging from the survey data show there
is general accord among plan sponsors regarding expansion of their financial
wellness focus, Aon Hewitt says. Most companies polled by the firm (93%) say they are
very or moderately likely to create or broaden their work around employee
financial wellness topics, including in a manner that extends beyond retirement-specific
decisions.

“Half of all companies believe the significance of financial
wellness concepts has increased over the last two years,” the survey report
continues.

Part of this effort involved improving other retirement plan
offerings—specifically defined contribution (DC) arrangements. Aon Hewitt finds
large employers in particular are looking to improve their defined contribution plans, usually by
leveraging their scale and size to get better pricing or expanded support from
service providers. In this environment, products and services that provide
savings and investing assistance to participants continue to gain favor, the
report shows. By the end of the year, Aon Hewitt predicts, features such as online
guidance, managed accounts, and phone access to financial planners or
investment advisers will be the norm, not the exception.

As part of this effort, 30% of plan sponsors have recently moved
from retail mutual funds to institutional share classes or separately managed
accounts. Additionally, about two-thirds of all plan sponsors are very likely
to review plan expenses and revenue sharing in 2015, Aon Hewitt says, and
one-third are planning on changing funds in an effort to reduce costs.

Click here
to access the ninth installment of Aon Hewitt’s annual plan sponsor
benchmarking report. The content in the report is based on survey responses
from nearly 250 employers, representing 6 million employees.